In resi development, “Other People’s Money” no longer cuts it

For years, one of real estate’s dirty little secrets was how little equity some developers put in their own real projects. The mantra was “Other People’s Money,” which allowed sponsors to recover from failures with only superficial wounds.

No longer. Now, “there’s enough skin in the game where it would be painful for the developer to walk,” said Don Peebles, CEO of the Peebles Corporation.

“Capital is plentiful, but it’s not dumb,” added Billy Macklowe, speaking at Haute Residence’s luxury real estate summit at the Core club Friday. “Most capital allocators want to see sponsor equity.”
Senior lenders are willing to contribute between 40 and 60 percent of the capital stack, down from as high as 90 percent pre-2008.

Mitchell Moinian of the Moinian Group said his firm puts up at least 50 percent of a project’s equity. And there are advantages to that approach, with sponsors having greater control over their projects, he said.

“The more you’ve seen the rodeo, the less you’re willing to expose yourself to highly-leveraged debt,” said Continuum Company’s Bruce Eichner, who’s on the third or fourth of his proverbial nine lives in this business.

Peebles said he typically puts up about 20 percent equity, and drew a comparison development and gambling.

“Our business is messed up,” he said. “It’s like being at a casino and you’re up but you’ve got to keep sitting there or you’re out. Our money goes back into deals if we’re building out business to a meaningful level, so you have capital for your next project.”

When it comes to financing, capital is still pouring into the U.S. from around the world, said Elie Hirschfeld, describing a recent trip to the United Arab Emirates. When Chinese money is less active, investors from Russia or South America may step up, said JDS Development Group’s Michael Stern.

There’s always a country of the moment,” he said. “There always seems to be an alternative.”

As a whole, the group sounded an optimistic note, particularly in the wake of a revived 421a.

“We’re all optimistic that you’re going to see a land market again,” said Stern, who said the lack of land sales over the past year has mitigated the risk of new condo oversupply.

Peebles threw his support behind President Trump’s proposal to slash the corporate tax to 15 percent from 35 percent. “I was getting ready to get out of the condo business,” he said, “because I was getting tired of paying taxes.”

One dark spot, though, was retail. Macklowe gave perhaps the most dire indictment of the retail market, calling it “fucked, plain and simple.”